Memorandum And Articles of Association Corporate Law Notes

Memorandum And Articles of Association Corporate Law Notes

Memorandum And Articles of Association Corporate Law Notes

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 Define memorandum of Association and discuss its subject matter.

Or

What are the main clauses in Memorandum of Association of a Company limited by shares ? Describe the procedure of altering the object clause.

Or

 

What is Memorandum of Association ? Describe its clauses. Define alteration in the capital clause.

 

Or

 

Define Memorandum of Association and explain briefly its contents.

Ans.  Memorandum of Association

The Memorandum of Association is the most important document of the company. In fact, it is foundation on which the structure of a company is based. It is the charter of a company which contains the fundamental conditions upon which alone the company can be incorporated. It defines the company’s relations with the outside world. It lays down the powers and objects of a company and the scope of operations beyond which it cannot do anything. Any action outside the scope of the Memorandum of Association will be ultra vires (beyond powers) of the company and so void.

Definitions

Under Section 2 (56) of the Companies Act, 2013, “Memorandum means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company laws or of this Act. ‘

This definition does not throw any light on the scope, use and importance of the memorandum in a company. We shall, therefore, examine some better definitions given by judges.

According to Lord Cairns, “The memorandum of association of a company is its charter and defines the limitation of the powers of a company. ” “The memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated.

 

According to Lord Macmillan : “The purpose of the memorandum is to enable the shareholders, creditors and those who deal with the company, to know what is its permitted range of enterprise.

Being the constitution of the company, this document is almost of unalterable nature. It is recognised under Section 13 that the Memorandum shall not be altered except in the manner and to the extent provided in the Act.

Forms of Memorandum of Association Under section 4 : The memorandum of association of a company shall be in such one of the forms in Tables A, B,C,D and E in Schedule I to the Companies Act, 2013 as may be applicable in the case of the Company.

Table A is a form for memorandum of association of a company limited by shares.

Table B is a form for memorandum of association of a company limited by guarantee and not having a share capital.

Table C is a form for memorandum of association of a company limited by guarantee and having a share capital.

Table D is a form for memorandum of association of an unlimited company and not having a share capital.

Table E is a form for memorandum of association of an unlimited company and having share capital.

Printing and signing of Memorandum [Under Rule 13 of Companies (Incorporation) Rules, 2014]—U/S 3(1) of the companies Act, 2013:

·         At least seven persons in case of a public company;

·         At least two persons in case of a private company;

·         At least one person in case of a one person company (OPC)  must subscribe their names to the memorandum.

Only a person capable to enter into a contract on his own can subscribe to the memorandum. Both artificial and natural persons can subscribe to the memorandum.

In the case of an illiterate subscriber to the memorandum, the thumb impression or mark duly attested by the person writing for him should be given.

The memorandum shall be printed. Computer printing is recognised for this purpose. It shall be divided into paragraphs numbered consecutively and shall be signed by each subscriber, with his address, description and occupation added, in the presence of at least one witness who will attest the same.

Subject-Matter, Clauses or Contents of Memorandum of Association (Section 4)  Contents of a memorandum of association depend on the type of the company. The contents of memorandum of association of a company limited by shares shall contain the following matters or clauses as per Table A of the Schedule I to the Act.

(l) Name Clause : This clause contains the name of the proposed company. The company being a legal person must have a name to establish its identity. A company may choose any suitable name it likes, but no company shall be registered by a name which in the opinion of the Central Government is undesirable and in particular which is identical or which too nearly resembles with the name of an existing company.

For example, Hindustani Steel Ltd. will be considered undesirable if already a company named Hindustan Steel Ltd. has been registered with the Registrar, as the name is similar to an existing company only with a difference of one word ‘i’ in the first letter of the name of the company.

The public company with limited liability must add the word ‘Limited’ at the end of its name, and the private company the word ‘Private Ltd.’

The name should not connote government participation or patronage unless circumstances justify the usage of such words. It should not include the word cooperative, bank, banking, insurance, investment unless the circumstances justifies.

Requirements—As per Section 12(3) every company should

(i) Paint or affix its name, outside its registered office, and outside every place where it carries on business, in a conspicuous position, in legible letters and in the language in general use in the locality,

(ii) Get its name, address of its registered office corporate identity number along with telephone number, fax number, if any, e-mail and website addresses, printed in all its business letters, letter heads, bill heads and in all its notices and other official publications; have its name printed on hundies, promissory notes, bills of exchange, etc.

Default—if there is any default in compliance it will lead to a fine of I ,000 per day on the company and every officer of the company who is in default till the default continues.

2. Situation Clause or Registered Office Clause—Memorandum of Association must state the name of the State in which the registered office of the company is to be situated. The registered office clause is important for two reasons.

(i) Firstly, it determines the domicile of the company. This in turn establishes the jurisdiction of the High Court of the State in which the registered office is situated.

(ii) And secondly, it is at the registered office where the company’s statutory books are normally kept, and to which notices and other communication can be sent.

Registered office of a company is the place of its residence for the purposes of delivering or addressing any communications, service of any notice or process of Court of Law and for determining the question of jurisdiction in any action against the company. A company need not carry on its business at its registered office. Nor there is any bar to having a registered office in one state and carrying on business in another. Every company must have a registered office on and from 15th day of its incorporation and at all times thereafter.

3. Object Clause—The object clause is another most important clause of the memorandum. In this clause, objects of the proposed company are set out. According to the provisions of Companies Act, 2013, object clause of memorandum shall state the objects of the company as follow:

(a) The objects for which the company is proposed to be incorporated.

(b) Any other matter considered necessary in furtherance of these objects. [Section 4(1) (c)]

A company can pursue the objects stated in the object clause of the memorandum. Any act beyond the object clause is ultra vires the company, and therefore, void.

Factors to be Considered—Although the subscribers enjoys unrestricted freedom to choose the objects of the proposed company, but the following factors should be considered while constructing the object clause:

l. They should not be against the provisions of the Companies Act.
2. They should not be illegal or against public policy.
3. They must be certain and unambiguous.
4. They must be complete and comprehensive.

4. Liability Clause [Section 4 (1) (d)]: This clause states the nature of liability of the members of the company. It may be limited by the face value of the shares held by them. In such a case, the members are liable only to the amount unpaid on the shares taken by them. If the shares are fully paid his liability becomes nil and where a shareholder holding a 10 shares has paid 5 on it, can be called upon to pay the balance of? 5 only. In case the liability of a member is limited by guarantee, this clause will state the amount of guarantee which the member has agreed to contribute in case the company goes into liquidation. A company registered with unlimited liability need not give this clause in its Memorandum.

In case of one Person Company (OPC), the name of the person who, in the event of death of the subscriber, shall become the member of the company is required to be given in the memorandum of association. [Section 4 (1) (d)]

5. Capital Clause [Section 4(1) (e)]: The capital clause in the Memorandum of a company, having a share capital, must state the amount of the share capital with which the company is to be registered which is usually called authorized or nominal capital, Further, the different kinds of shares and face value of each share is also required to be given in the memorandum. It may be noted that in case of a company without a share capital,.no such clause exists in its memorandum.

This clause lays down the limit beyond which the company cannot issue shares without altering the memorandum.

6. Association or Subscription Clause : This clause provides that those who have agreed to subscribe to the memorandum must signify their willingness to associate and form a company. According to Section 3 (l) of the Act, at least seven persons are required to sign the memorandum in the case of a public company, and at least two persons in the case of a private company.

If a private company is registered as OPC (one person company), it shall have only one subscriber. It is also pertinent to note that no subscriber can withdraw his name on any ground after registration of the memorandum of association.

In this clause, the subscribers make promise like this “we the several persons, whose names, addresses and occupations are subscribed, are desirious of beino formed into a company in pursuance of this Memorandum of Association, and we respectively agree to take the number of shares in the capital of the company set opposite our respective names.

The memorandum has to be signed by each subscriber in the presence of at least one witness who must attest the signatures. Each subscriber must write opposite his name the number of shares he shall take. No subscriber to the memorandum shall take less than one share.

In case of OPC, this clause shall state that the subscriber/member agrees to take all the shares in the capital of the company.

7. Nomination Clause : This clause is applicable only in case of OPC to describe the nominee in the event of death of the subscriber. Prior written consent of nominee required to be obtained in form No. INC3. Nomination, in Form No. INC2 along with written consent in Form No. INC3 shall be filed with ROC at the time of incorporation of OPC alongwith its memorandum amd articles.

Importance of Memorandum of Association

The memoranduln of association is an extremely important document in relation to the affairs of the company. It is a document which sets out the onstitution of the company and really the foundation on which the tructure of the company is built. Palmer states in this regard “It is a Document of great importance in relation to the proposed company.” mportance of memorandum of association can be cleared with the help of he following facts :

(l) It is the essential document for the establishment of a company.

(2) It contains the fundamental conditions upon which alone the

ompany is allowed to be incorporated.

(3) It defines the company’s relation with the outside world.

 

(4) It defines the objects, scope and powers of the company.

(5) It explains the capital structure of the company.

(6) The company cannot do anything beyond the limit of the memorandum of association.

(7) It enables the shareholders, creditors and those who deal with the company to know what is the permitted range of the enterprise.

(8) It explains the liabilities and risk of the subscribers.

(9) Making any alteration in the memorandum of association is not a easy job.

(10) Any aét done outside the power given by the memorandum of associations is ultra vires and cannot be ratified even by the whole body of the shareholder.

Q. 11. What is Memorandum of Association ? How it can be altered ?

Or

“Memorandum of Association is the most important document of the company.” Explain. How alteration can be made in it ? Ans. Alteration In Memorandum of Association  Generally memorandum of association is considered as an unalterable document. According to Section 13, a company may alter the provisions of its memorandum by passing a special resolution and after complying with the procedure specified in the Act.

Alteration in the various clauses of the memorandum can be made as follows :

1. Alteration in the Name Clause ISection 13(2)1

(a) Defaulting Companies Prohibited to change the name—The change of name shall not be allowed to a company which has defaulted in filing its annual returns or financial statements or any document due for filing with the Registrar or which has defaulted in repayment of matured deposits or debentures or interest on deposits or debentures [Companies (Incorporation) Rules 2014]

(b) Alteration in the Name clause by Special Resolution —The name of a company can be changed any time by passing a special resolution at the general meeting of the company, and getting the approval of the Central Government in writing. However, a change of name which merely involves the deletion or addition of the word ‘private’ on the conversion Of a public company into private or vice versa doesn’t require the approval Of Central Government.

(c) Alteration in the Name clause by Ordinary Resolution—If through inadvertence or otherwise, a company is registered by a name which, in the opinion of the Central Government, is identical with or too nearly resembles the name by which a company in existence had been previously registered, it may direct the company to change its name and the company shall change its name or new name, as the case may be, within a period of 3 months from the issue of such direction, after adopting an ordinary resolution for the purpose.

(d) Issue of New Certificate—Where a company changes its name or obtains a new name, it shall within a period of 15 days from the date of such change, give notice of the change to the Registrar along with the order of the Central Government, who shall carry out necessary changes in the certificate of incorporation and the memorandum and shall issue a fresh certificate of incorporation. The change of name shall be complete and effective only on the issue of such a certificate. An application shall be filed in Fonn No. INC. 24 along with the fee for change in the name of the company and a new celtificate of incorporation in Form No. INC. 25 shall be issued to the company consequent upon change of name. [Under Rule 29 of Companies (Incorporation) Rules, 2014]

(e) Rights and Obligations to remain unaffected—It is to be noted that change of name will neither affect any rights or obligations of the company nor render any legal proceedings by or against the company defective in any way.

2. Alteration in Registered Office Clause

The place of registered office of a company may be altered/changed in any of the following ways:

I. Changing Place within the Same City, Town or Village—A company may change its registered office from one place to another within the local limits of the same city, town or village by taking following steps:

1. Board of directors shall pass a resolution for changing place of registered office within the same city and change the place of registered office.

2. Give notice of the change duly verified in the prescribed manner, within 15 days of the change of place to the registrar. Registrar shall record the same. [Section 12(4)]

II. Changing Place within the same State under the JuriSdiction of the same Registrar—A company can change its registered office from one place to another within the same State under the jurisdiction of the same Registrar by taking following steps:

l. Pass a special resolution in general meeting of the company.

2. Then change the situation/place of registered office as per the resolution passed.

3, Give notice of the change duly verified in the prescribed manner within 15 days of the change of place to the Registrar. Registrar shall record the same. [Section 12(4) and (5)]

III. Shifting of the registered office within the same State from the jurisdiction of one Registrar of Companies ‘ to the jurisdiction of nother Registrar of Companies requires passing of special resolution by he company and confirmation by the Regional Director on an application ade by the company in this regard. The confinnation by the Regional Director shall be communicated within a period of thirty days from the date of receipt of application by the Regional Director to the company and the company shall file the confirmation with the Registrar within a period of sixty days of the date of confirmation who shall register the same and certify the registration within a period of thirty days from the date of filing of such confirmation. This certificate shall be conclusive evidence that all the requirements of this Act with respect to change of registered office have been complied with and the change shall take effect from the date of the certificate.

Note : In such a case, The shifting of registered office shall not be allowed if any inquiry, inspection or investigation has been initiated against the company or any prosecution is pending against the company under the Act.

IV. Shifting of Registered Office from one State or Union Territory to another State or Union Territory—Where an alteration of the meniorandum results in the transfer of the registered office of a company fronl one State or union territory to another, a certified copy of the special resolution passed and order of ethe Central Government approving the alteration shall be filed by the company with the Registrar of each of, the States within such time and in such manner as may be prescribed, who shall register the same, and :k.e Registrar of the State where the registered office is being shifted to, shall issue a fresh certificate of incorporation indicating the alteration.

3. Alteration in Rhe Objects Clause [Section 12(8)]

The Companies Act empowers companies to make alterations in the objects or the object clause of the memorandum. The provisions in respect 10 alteration of objects may be discussed under the following two heads:

(A) Alteration where company has unutilized money out of the money raised through prospectus.

(B) Alteration in any other case

(A) Alteration where Company has Unutilized Money out of the Money Raised through Prospectus—A company, which has raised money from public through prospectus and still has any unutilised amount out of the money so raised, shall not change its objects for which it raised the moneythrough prospectus unless it satisfies the following conditions:

(i) Special resolution—The company shall pass a special resolution through postal ballot for effecting change in its objects. The notice of the postal ballot shall contain the following particulars:

(i) Total money received.

(ii) Total money utilized for the objects stated in the prospectus.

 

(iii) Unutilized amount out of the money so raised through prospectus.

(iv) Paniculars of the proposed alteration/change in the objects.

(v) Justification for the alteration/change in the objects.

(vi) Amount proposed to be utilized for the new objects.

(vii) Estimated financial impact of the proposed alteration on the earnings and cash flow of the company.

(viii) Other relevant information which is necessary for the members to take an informed decision on the proposed resolution.

(ix) Place from where any interested person may obtain a copy of the notice of resolution to be passed. [Sec. 13(8) and Rule INC-32(1)]

(ii) Publication of details of resolution—The details, as may be prescribed, in respect of such resolution shall also be published in the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated and shall also be placed on the website of the company, if any, indicating therein the justification for such change.

(iii) Opportunity to exit to the dissenting shareholders—The promoters and shareholders having control on the company shall give an opportunity to the dissenting shareholders to the resolution to exit from the securities in which they have invested their money. The opportunity to exit shall be given in accordance with regulations to be specified by the SEBI. [Section 13(8)]

(B) Alteration in Any Other Case—A company in any other case may alter its objects stated in its memorandum after passing a special resolution. The resolution may be passed at a general meeting of the company or through postal ballot. [Section 12(1)]

Other General Provisions:  The other provisions with respect to alteration of objects of company which are applicable to both the cases of alteration of objects are as follows:

(i) Obtaining approval of the sectoral regulators—Sometimes, a company intends to alter its object clause with a view to pursuing the objects that require registration or approval from sectoral regulators such as RBI and SEBI. In such a case, approval from such regulators shall be obtained by the company before such alteration. [Proviso to Rule INC-12 inserted on 29th May, 2015]

(ii) Filing documents to the Registrar— company shall file the following documents with the Registrar in the even, of alteration of object clause:

(a) A certified copy of the special resolution passed by the company. tSection

(b) Copy of the details of the resolution and postal ballot notice published in the newspapers.

(c) A certificate certifying the compliance of regulations in respect of the opportunity given to the dissenting shareholders to the resolution toexit from the securities in which they have invested their money.

(d) A copy of the approval of sectoral regulators if any obtained by the company for pursuing objects that require approval from the sectoral regulators such as RBI and SEBI. [Proviso to Rule INC-12 inserted on 29th May, 2015]

(iii) Registration and certification of alteration—On receipt of the above documents, the Registrar shall register the alteration of the object clause of the memorandum. The Registrar shall also certify the registration of alteration of object clause within a period of 30 days from the date of filing of the special resolution. [Section 13(9)]

(iv) Effect of alteration—No alteration made shall have any effect until it has been registered in accordance with the above provisions. [Section 13(10)]

4. Change in Liability Clause

The liability of the members cannot be made unlimited without their consent in writing. By changing the Memorandum or Articles a member cannot be compelled to buy additional shares of the company. However, a club or an association, by altering its Memorandum or Articles can raise the periodical subscription without the consent of its members in writing. Further, liability of the directors, managing director or manager can be made unlimited with their consent provided the Articles so provide.

Further unlimited liability of the shareholders can be made limited by passing a special resolution and obtaining the approval of the Company Law Tribunal.

In the alternative, an unlimited company may register itself as a limited company. However, it will not affect any debt, liabilities, obligations already incurred or contracts made before such registration.

5. Alteration in Capital clause

If the articles authorize, a company limited by shares can alter capital clause of its memorandum. An alteration may result in increase, reduction or reorganisation of.the capital. Sometimes, it involves the conversion Of shares into stock or vice-versa.

Following kinds of alteration in share capital may be made by a limited company having a share capital, if authorised by its articles by passing of ordinary resolution at the general meeting (Section 61)E

(i) increase its authorized share capital;

(ii) consolidate or sub-divide its share capital into shares of larger or smaller denominations;

(iii) convertits fully paid-up shares into stock, and re-convert that stock into fully paid-up shares of any denomination;  (iv) cancel shares which have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.

Q. 12. What is an Article of Association ? Explain procedure of its alteration.

Or

Define an Article of Association and explain its subject-matter. Is it necessary to prepare Article of Association for every company ?

Or

What is an Article of Association ? Is it necessary for every company to have its own article of association ?

Or

What do you understand by Article of Association ? How does it differ from Memorandum of Association ? State how articles can be altered ?

Ans.

Meaning And Definitions of Articles of Association

The Article of Association is the second most important document of the company. It lays down the rules and regulations for the internal management of the company as well as for the attainment of the objectives set by the Memorandum of Association.

Articles are subordinate to the Memorandum and help in achieving the objects given in the Memorandum. It defines the duties, rights and the powers of the Board of Directors and also the manner in which the business of the company is to be carried on. However, being subordinate to the Memorandum, they cannot extend the objects as defined in the Memorandum. The Articles define the area within which the shareholders
may make such rules and regulations for their own management as they think fit but not beyond the area defined by the Memorandum. Moreover, these rules should not go beyond the provisions of the Companies Act.

According to Section 2 (5) of the Companies Act, 2013 “Articles mean the Articles of Association of a company as originally framed, or as altered from time to time in pursuance of the previous companies law or of this Act. ‘

The above definition does not indicate about the nature and contents of this document. It will, therefore, be appropriate to discuss some other definitions.

According to Lord Justice Bowen, “The memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated They are conditions introduced for ‘ the benefit of the creditors, and the outside public, as well as of the ‘shareholders. The articles of association are the internal regulations of the company and are for the benefit of shareholders.” According to Justice Charlesworth, “The Articles of Association is a document regulating the rights of menlbers of the company among themselves and the manners in which the business of the company shall be conducted.”

Thus, the Articles of Association contains the rules and regulations framed for the internal management of the company.’ It regulates domestic management of a company and creates certain rights and obligations between the members and the company.

The formalities that are required to be complied with for registartion of articles, the Articles have to be printed, divided into paragraphs, numbered consecutively and signed by each subscriber of the Memorandum of Association who shall add his address, description and occupation in the presence of at least one witness who shall attest the signature and shall likewise add his address, description and occupation, if any.

Need or Importance of Articles of Association

Importance of Articles of Association can be clarified on the basis of the following points :

(1) Essential for Registration : It is essential for a private company, a company limited by guarantee and an unlimited company to register their articles along with the Memorandum. However, it is not obliggtory to register Articles in case of a public company limited by shares. In such a case model articles contained in ‘Table F’ of Schedule I will apply.

(2) Helpful in attaining objects : Articles of Association helps in the attainment of objectives set by the Memorandum of Association. It defines the rules and

(3) Helpful in Internal Management : regulations for the internal management of a company.- It also defines duties, rights and powers of the Board of Directors and thus prove helpful in the administration of the company.

(4) Mutual Relationship : The Articles regulate the relationship between the company and its members and employees.

(5) Public Document : Articles is a public document as it can be seen by anybody. It is therefore assumed that any person who deals with the company is familiar with the contents of the document.

Contents or Subject Matter of Articles of Association : The Articles of Association of a company should usually contain the following matters :

(i) The extent to which “Table F” is applicable.
(ii) Definition of important terms and phrases used in the articles.
(iii) Share capital and rights attached to different classes of shares.
(iv) Procedure as to making of calls and forfeiture of share.
(v) Appointment of managerial personnel, e.g. directors, managing directors etc., their rotation, powers and duties.  (vi) Rules as to—

(a) transfer and transmission of shares
(b) issue of share certificate
(c) general meetings
(d) common seal of the company
(e) dividends, reserves and capitalisation of profits
(f) accounts and audit
(g) lien on shares
(h) remuneration of managerial personnel
(i) issue of redeemable preference shares
(j) paying commissions and fixing rate thereof
(k) paying interest out of capital
(l) winding up of the company  Regulations contained in the Articles of Association must„ not/ go beyond the powers of the company as laid down by the Memorandum of Association nor violate any of the requirements of the Companies Act. All clauses in the Articles which are ultra-vires the Memorandum or the Act shall be null and void.

Is it necessary to prepare Articles of Association for Every Company : It is not obligatory to register Articles in the case of a public company limited by shares. In such a case model articles contained in ‘Table F’ of Schedule I will apply. However; a private company, a Company limited by guarantee and an unlimited company must register their articles along with the Memorandum.

Model Forms of Articles

The Companies Act lays down model forms of Articles for various types of companies. These are discussed as under:

Table F : Contains a model set of Articles for a public limited company with share capital. It contains 91 regulations.

Table G : Contains a model set of Articles for a company limited by guarantee and having share capital.

Table H : Contains a model set of Articles for a company limited by guarantee and not havinga share capital.

Table I : Contains a npodel set of Articles adopted -by an uniimited company having a share capital.

Table J : Contains model articles for an unlimited *company not having share capital.

Alteration of Articles of Association

A company has a statutory right to alter its articles of association’, A company can do it at any time by passing a special resolution. But the basic ‘requirement is that the power of alteration must be exercised in good faith andiin athe4interest of the company. The, company can ‘use its power of alteration subject to the following limitations :  (l) Articles can be altered by passing special resolution only.

(2) Alteration must not be inconsistent with the provisions of the Companies Act or any other law.

(3) Alteration must not be inconsistent with the Memorandum of Association.  (4) Alteration must not be illegal or opposed to public policy or in lawful.

(5) No alteration can be made without approval of Central unlawful. Government or the Tribunal if so required. For example, for conversion of public company into private company approval of the central Government

(6) Alteration seeking to impose an additional liability on a member is must. of the company after the date on which he became a member shall not be binding upon him unless he agrees in writing to such an alteration. However, it is valid where the company is a club or any other association and the alteration of Articles provides for increase in the rate of subscription by the members.

(7) The alteration must be made bonafide for the benefit of the company as a whole and not for the benefit of a. particular class of shareholders.

(8) The alteration must not constitute a fraud on the minority, otherwise it will be void being oppressive to them.

(9) The alteration must not result in a breach of contract with outsiders. Such an alteration shall be void and the company shall be liable.

(10) The amended regulation in the articles cannot operate retrospectively, but only from the date of amendment.

(l l) Once the alteration is made, it shall have effect as if originally contained in the Articles.

Memorandum And Articles of Association Corporate Law Notes
Memorandum And Articles of Association Corporate Law Notes

Q. 13. Discuss the effects of the Memorandum .and the Articles on their registration with the registrar of joini stock companies.

Or

Distinguish between Memorandum and Articles of Association. Define the extent to which these (i) bound the members to the company, (ii) bound the members with each other, (iii) bound the company to its members, (iv) bound the company to the outsiders?

Ans. “Subject to the provisions of this Act, the memorandum and articles shall when registered with the Registrar, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, aid contained convenants on its and his part to observe all the provisions of the memorandum and of the articles.” (Section 10)

Thus, on registration, the memorandum and Articles of Association have binding effects on both the company and the members.  The extent to which these documents bind the company and members can be studied under the following heads :

(l) The Members are Bound to the Company : Members are bound to the company to observe and follow the provisions of the memorandum and articles. For example, if the Articles provide for company’s lien on shares for any debts due from the members to the company, the shareholders are bound by this provision.

(2) The Company is Bound to its Members : The Articles constitute a contract binding the company to its members only in their capacity as members. Therefore, a company is bound to comply with the provisions in the Articles or the Memorandum. A member can restrain the company from committing a breach of the Articles which affects his right as a member. For example, a member can enforce his right to receive share certificate in respect of shares allotted or transfer of shares registered in his name. Again, he can enforce his right to receive notice of Company meetings or a right to receive dividend when declared by the company.

(3) Binding Members inter se : As between the members themselves, they are bound by the provisions of the Articles. The Memorandum and Articles of Association do not constitute express agreement among the members of the company, but each member is bound by these documents on the basis of the implied contract. The Articles regulate their right inter se. But such rights can be enforced only through the company.

(4) Company’s Liability towards outsiders : The Articles or Memorandum do not give a right to outsiders i.e., vendors, solicitors, secretary etc. against the company or the members. An outsider cannot claim a right on the basis of any provision in the Articles. Even a member enjoying certain rights in capacity other than that of a member cannot enforce them against the company. In the case of Eley Vs. Positive Life Assurance Company, the Articles of the company provided that Eley should be the solicitor of the company for life and should not be removed from office except for misconduct. Eley acted as solicitor to the company and also became a member of the company. After some time the company dismissed him without alleging misconduct. E sued the company for damages for breach of regulations of Articles in a capacity other than that of a shareholder. Held, Articles did not constitute any contract between the company and an outsider andas such no action would lie.

Realizing the harshness of the Proposition, the court modified the rule by developing the doctrine of implied contract between the company and an outsider in terms of Articles. New British Iron Co. on the basis of the clause in the Articles directors have to be paid as remuneration. It was held that the term of the Articles becomes a part of the contract which the director could enforce against the company.  Distinction Between Memorandum And Articles of Association

Basis of DifferenceMemorandum of AssociationArticles of Association
1. Nature

 

It is the fundamental document of the company upon which alone, the company is incorporated.It is the subsidiary document framed to govern the internal management of the company.
2. Subject Matter

 

It defines the objects and powers of the company. It determines the scope and the extent of the activities of the company.It contains the rules and regulations by which the objects of the company can be carried out.
3. Necessity Every company must file its Memorandum Association at the time of incorporation.It is not essential for a company limited by Shares to have .its own Articles. Such companies may adopt ‘Table F’.
4. Alteration

 

Memorandum can not be altered except in the manner and to the extent provided by the Act.The articles being only the bye-laws of the company, can be altered by a special resolution.
5. Relationship

 

It defines the relationship between the company and the outside world.It establishes the of the relationship company with the members.
6. Provisions

 

It is prepared according to the provisions of the Companies Act.It is subsidiary to both the Companies Act and the Memorandum.
7. Ratification

 

Act done by a company beyond the scope of its memorandum are absolutely void and cannot be ratified.Act done by a company beyond the Articles can easily be ratified ‘by the shareholders.

Q. 14. What do you understand by the ‘Doctrine of Indoor Management’ ? What are its exceptions ?

Discus the meaning and importance of the following;

(i) Doctrine of Indoor Management (ii) Doctrine of Constructive notice

Or

“Memorandum and Articles are public documents.”  Explain this statement and idiscuksf the doct+ine« of Constructive t Notice in this connection..  Ans.

Doctrine of Constructive Notice

Or

Memorandum And Articles Are Public Documents

When the memorandum and articles of association, have been registered with the Registrar of Companies, they are deemed to be public documents. Any person can examine these particulars and get their copies by paying the requisite fee. It is, therefore, assumed that any person who deals with the company is familiar with the contents of these documents. This is known as constructive notice. Under the doctrine of ‘constructive notice’, every person dealing with or proposing to enter into a contract with the company is assumed to have constructive notice of the contents of the memorandum and the articles of the company. Whether he actually reads them or not, it is presumed that he has read these particulars and has ascertained the exact powers of the company to enter into the contract, the extent to which these powers are delegated to the directors and limitations to such powers. If a person enters into a contract which is ultra-vires the memorandum or beyond the powers of the directors, then the contract is invalid and he cannot enforce it, even though he acted in good faith.

The doctrine of constructive notice of the Memorandum and Articles, however, is not a positive doctrine but a negative one. It is like doctrire of estoppel. ‘It does not operate against the company. It operates only against an outsider dealing with the company. Suppose, the Articles provide that a Bill of Exchange must be signed by two Directors and in case the Bill is Signed by one Director only, the holder cannot claim payment thereon.

Exception : However, there is one exception to the doctrine of constructive notice. The outsiders dealing with the company are entitled to assume that as far as the internal proceedings of the company are concerned they have been done regularly. But they need not enquire into the regularity of the internal proceedings. In fact they can persume that the company is supposed to do all internal matters as per Companies Act. This is known as ‘Doctrine of Indoor Management. ‘

Doctrine of Indoor Management

The Doctrine of Indoor Management is an exception to the rule of constructive notice. According to this doctrine, the persons dealing with the company are entitled to assume that internal proceeding of the company relating to the contract are regular as per the Memorandum and Articles. No doubt a person dealing with the company is presumed to have the knowledge of these documents and their contents but he •is not bound to do anything more, If his contract is within the powers as conferred by the Memorandum, ‘irregularity in the internal management of the company will not affect his right under the contract. This rule is based upon the decision given in the leading case of  Royal British Bank Vs. Turquand (1856).

The directors of the bank issued a bond to Mr. Turquand. The Articles provided that the directors had the power to issue bond if authorised by a proper resolution of the company. No such resolution was passed. It was held that Turquand could sue on the bond as he was entitled to assume that the resolution must have been passed. It was observed that. persons dealing with the company are bound to read the registered documents and to see that the proposed dealing is not inconsistent therewith. But they are not bound to do more; they need not inquire into the regularity of internal proceedings.  Briefly stated the “doctrine of indoor management” lays down that ‘persons dealing with lhe company are only required to see that the proposed dealings are apparently regular and consistent M’ith .the memQrandum and articles. They need not enquire into the regularity of the internal proceedings of the company. They are entitled to presume that the directors are acting lawfully in what they do, and can hold the company liable even if the internal formalities are found not to have been completed.’

Exceptions To The Doctrine of Indoor Management

A person dealing with the company cannot take the benefit of this doctrine in the following situations :

1. Knowledge of Irregularity : Where a person dealing with a company has actual or constructive (virtual) knowledge of the irregularity as regards internal management, he cannot claim the benefit of the Doctrine of Indoor Management.

2. Negligence : Where the circumstances are of a suspicious nature and the person has failed to enquire into it, he shall not be entitled to protect under this Rule.

3. Forgery : This rule will not apply where a document on which theperson seeks to rely is. a forgery, The doctrine of indoor management applies to irregularities which otherwise might affect genuine transactions. It cannot apply to a forgery.

Ruben Vs. Great Fingall Consolidated Co. (1906) : Ruben lent a company a sum of money on the security of a share certificate. The secretary had forged the signatures of the two directors and had affixed the seal on the certificate without authority. The company refused to register the share certificate. Ruben claimed damages. It was held that he could not do so because the rule did not apply where the document was forged.

4. No Knowledge of the Articles : This rule cannot be invoked in favour of a person who did not consult the memorandum and articles and thus did not rely on them.

5. Acts Beyond Apparent Authrity : The doctrine of management will not be applicable in a case where Secretary or Manager or any other officer of the company acts in a manner which would not ordinarily be within his powers unless the company has held him out as having authority to act in the matter.  Q. 15. Explain the doctrine of ‘Ultra Vires’. What are the effects of ‘ultra vires’ transaction ? Can a company ratify such transactions ?

Ans. Doctrine of Ultra-Vires : The word ‘ultra’ means ‘beyond’ and the word ‘vires ‘ means powers. Thus ‘ultra vires’ a company means ‘beyond the powers of a company.’ The memorandum of a company defines its powers. Any activity of a company beyond its Memorandum is, therefore, ultra vires the company.

Such an act is void and cannot be ratified even by unanimous resolution of all the shareholders.

The doctrine of ultra vires has been established to provide security to the shareholders and creditors of the company. By it shareholders are assured that their investment is not spent on activities which they did not have in mind when they invested in the company. It also safeguards the interests of the creditors as the property of the company cannot be diverted to unauthorised objects.

The doctrine of ultra vires was first applied in the case of Ashbury Railway Carrige Co. Vs. Riche. In this leading case, a company has been formed with the object of carrying on business as mechnical engineers and general contractors. The directors entered into an agreement for financing the construction of a railway line in Belgium, which was ultra vires the company. The company repudiated the contract itself later on. Riche sued the company for breach of contract and claimed damages. Held, the contract being ultra vires, was null and void. It was not binding on the company and the question of awarding damages did not arise.

Effects of Ultra Vires Acts

(l) Void Contracts : A contract made by a company beyondxits objects and powers is wholly void and provide no legal effect. As a result any one entering into an ultra vires contract cannot make the company liable for his claim.

(2) Injunction : When a company does anything beyond the scope of its activities or objects as described in the Memorandum of Association, any member of the company can get an injunction against the company restraining it from proceeding with the ultra vires act.

(3) Personal liability of the Directors : It is the duty of the directors to ensure that the capital of the company is used for the authorised acts of the company. If any part of it is used for any other purpose contrary to the Memorandum of Association, the directors will be personally liable to the company for breach of trust. The directors of a company paid dividends on shares out of capital. The company was afterwards wound up. The directors were held liable to refund the money so paid as the dividend could be paid out of profits only.  (4) Breach of Warranty of Authority : The directors of a company are its agents. As such it is their duty to keep within the limits of the company’s powers. If they induce, an outsider to enter into a contract which is ultra vires the company, they will be personally liable to the third party for his loss for breach of warranty of authority.

(5) Ultra Vires Acquired Property : If a company’s money has been spent in purchasing some ultra vires property, the company’s right over that property must be held secure. For, that asset, though wrongly acquired, represents the capital of the company. The position of the company in the case of ultra-rives acquired property is similar to the case of a minor.

(6) Ultra Vires Lending : A person borrowing money from the company under a contract which is ultra vires, can be sued by the company to recover the amount so lent.

(7) Ultra Vires Torts : A company cannot be made liable for torts committed by its officers in connection with a business which is entirely outside its objects. It can be made liable in torts only if these are committed in the course of intra vires activities by its servants or officers within the course of their employment.


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